Study of Financial Cycles

It has occurred to me that financial time series are far from simple random walks (even with fat tails). Financial markets exhibit cycles. My focus is on stocks, bonds, and inflation (gold). Two cycles are particularly interesting:

I only have some random thoughts and articles here (updated early 2011). Please check back later.

Overvalued Stocks

According to Robert Shiller and GMO Jeremy grantham, the stock market is overvalued. My take is that the correction that started since 2000 has to run into mid-decade of 2010's.

Bonds Ran Out of Steam

According to Bill Gross, the 30-year bull market of bond is approaching the end as of 2011.

A Case For Gold

When both stocks and bonds are out of favor in the decenial assessment, gold is the only major asset class to invest. The case for gold is obvious. The 2008 financial crisis ruined the balance sheet of major governments. The decade of 2010's will be a decade of inflation. The U.S. government will not defend the inflation since the treasury interest rate is at the low end and it will just let inflation kick in to "fix" the debt problem and the overvalued stocks and home prices.

How high can gold price be? My assessment is the naive $5,000-$10,000 per ounce. One day in the next few years, you will see SPDR Gold ETF being the largest ETF with $500 billion cap. Then you know gold's time is up.

A lot of people compare the history of gold and Dow in the last 110 years. They often concluded that gold as an investment is far inferior to stocks. This conclusion is in general correct if your investment thesis is a century of buy-and-hold. But most people (including professionals) can rarely hold an investment for more than 3-5 years. Since gold is the last resort safe haven of money, it exhibits very long (and simple) cycles. From 1972 to 1980, gold rose from $43 to above $600 (Peak at $843 on 01/21/1980). This x15 times appreciation is not any inferior than the bull market of Dow from 1950 to 1966 or from 1980 to 2000.

But gold stayed around $400 in the 80's and 90's and dropped to $250 in 2001. Then it took off the decenial rally to above $1000 in 2010. Since gold has broken its previous high of $800 in 1980, it is going to move to the "next level". By all means, it indicates the range of $5,000-$10,000 is in the reach, which may take another 6-10 years. Once gold reaches the high end of this level, the U.S. government will be in good shape again.

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